Do Banks Factor Invoices? | Bank Factoring | FundThrough (2024)

Before we go further, let’s go over a quick explanation of what invoice factoring is and how it works. Invoice factoring is a form of financing where a business owner sells outstanding invoices (or accounts receivable) to a factoring company for quick access to funds. The business owner receives cash for the invoice amount, less a factoring fee, ahead of the payment terms. The business owner’s customer, who is responsible for paying the outstanding invoice, instead pays the original invoice amount to the invoice factoring provider according to the original payment terms, after which the factoring process is complete. Invoice factoring also goes by the terms accounts receivable factoring, supply chain financing, or receivable financing.

In addition, there are two main types of invoice factoring in banking to consider when weighing your options — factoring without recourse or factoring with recourse.

Briefly, factoring with recourse means if your customer fails to pay to the factoring business, you’re on the hook for the unpaid invoice. With non-recourse factoring, the key difference is that the factoring company accepts any loss resulting from non-payment. Basically, you’re not obligated to pay the invoice back in the unlikely event that your slow-paying customer doesn’t pay the invoice.

Banks may factor invoices for a number of reasons, but the main purpose is to provide financing to businesses that need working capital. For banks, funding invoices can be a way to generate income from lending to businesses without taking on the risks associated with traditional lending. Additionally, factoring can provide banks with a way to build relationships with small and medium-sized businesses that may be seeking other banking services, such as loans or lines of credit, in the future. Some other reasons banks factor invoices include:

• They already have access to capital.
• They recognize their SMB clients can’t qualify for traditional financing.
• They want their SMB clients to grow with them, so eventually they will qualify for traditional financing.
• They’ve partnered with a factoring firm that makes it easy to offer SMB clients an alternative source of working capital.

However, more banks don’t factor invoices, often for these reasons:

• Factoring requires specific expertise and talent that can be expensive and difficult to source.
• Factoring requires specific operations that can be time-consuming to set up.
• The banks typical customers wouldn’t use factoring.

Like any source of funding, there are advantages and disadvantages to factoring with banks. Here are the pros and cons of funding invoices with banks, to help you make an informed decision about whether factoring with a bank is the right financing option for your business:

Pros

• Direct access to capital
• Can offer multiple financial products
• Under government regulation

Cons

• Less people and resources dedicated to invoice finance platform and product
• Manual processes that create inefficiencies
• Hidden fees like application fees and transaction fees
• Advance rates up to 95%

While a factoring arrangement with a dedicated factoring business can provide you with a range of benefits, such as higher advance rates and improved credit management, there are a couple of potential downsides to consider.

Pros

• Fast, flexible access to a source of funds
• Technology-backed factoring process and online applications eliminate paperwork
• Online invoice finance platform
• Often integrated with popular accounting software
• Unlimited funding (FundThrough only)
• Advance rates up to 100%
• No hidden fees (depending on company)
• Dedicated partner

Cons

• Cost of capital built into discount rate. (Reminder: The discount rate is also known as the invoice factoring rate. It is the amount of money that the factoring company withholds from the eligible invoice total as their payment for advancing cash and waiting to get paid for you.)
• Not regulated

Many banks offer factoring services to their business customers as a financing option. Some factoring banks include:

• altLINE (part of The Southern Bank Company)
• Wells Fargo
• JPMorgan Chase
• Fifth Third Bank
• Citi Bank
• HSBC

The Bottom Line

As you can see, banks factor invoice payments, and they might even be a good choice for your business if you’re looking to secure traditional bank financing in the future. That said, from our experience, your best bet to get the most benefit out of factoring possible would still be to go with a dedicated factoring partner.

While the process for getting bank financing can be long and difficult, business loans and lines of credit have a place in a thoughtful financial strategy. It’s no secret that a line of credit is a convenient, low cost source of financing. Our CEO even wrote an article about why you should get a line of credit – if you can qualify.

That point is why business factoring (or invoice financing) is better than bank loans for so many small, growing businesses. Oftentimes, our small business clients have told us that they don’t yet have the financial documentation or annual revenue the bank wants to see, or they can’t wait the 3-to-6 months it’ll take to get approved. Sometimes, the bank doesn’t want to talk at all.

For those without adequate business credit history, receivables financing has become a reliable source of working capital because it’s as convenient as a line of credit while providing quick access to cash. But those aren’t the only reasons.

Here are 6 more reasons why many business owners prefer invoice factoring to bank loans when considering their business financing options, and why you might, too.

Bank financing options have very strict requirements in terms of credit scores and require tons of paperwork, often making the loan approval process a complex and lengthy one. It can take up to several months for the bank to make its decision. Worse yet, after all that time, the loan may not even go through – leaving you at square one to get cash. It’s a stressful situation if you need a source of cash quickly.

In the case of invoice financing, the approval process is fast (via an online application) and the invoice factoring agreement is simple. As soon as your customer verifies that the invoice is real for the factoring company and confirms that they will redirect payment, you can get a cash advance in as quickly as a few business days, or even 24 hours.

If you can’t qualify for traditional loans or lines of credit, but need a boost to your business finances, invoice factoring provides a predictable source of cash and flexible solution to financing needs. While many traditional invoice factoring required business owners to fund a minimum number or dollar amount of invoices, newer factors allow you to choose which invoices you want to fund (even just a single invoice) whenever you want to fund, providing payment in a matter of a few business days.

Factoring for cash flow creates greater liquidity, allowing businesses to cover their expenses (like payroll, buying in bulk, or expanding operations) in a timely manner and use the additional working capital to take advantage of more opportunities to help the business grow and profit. And all without creating debt, as we’ll discuss next.

Bank loans may be preferable for businesses with the financials necessary to qualify for bank financing. But for the many businesses that don’t have bad debt or a credit rating that qualifies them for bank loans or credit cards, working with an invoice factoring provider for accounts receivable financing is a convenient option.

Invoice factoring is a smart choice for B2B business owners who need capital and are optimistic about their business’ growth potential. By enabling you to turn invoices into cash, this alternative lending practice provides liquidity without adding debt or making you give up any equity in your business.